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Abstract

Previous research has shown how various technologies became the market standard. This chapter presents some refined models and applies them to the case of compressed audio formats. The authors analyze the rise of MP3 as the market standard and identify several key factors that contributed to its success. First, a process of formal standardization reduced the number of competing compressed audio formats. Secondly, enabling technologies, in particular the rise of the Internet, contributed significantly to the success of compressed audio formats. The timing of market entry was important in the sense that when the rise of the Internet took place, MP3 was one of the few fully developed compressed audio formats. MP3 offered technological superiority (high fidelity at low data rate) versus its initial competitors. The technology also benefitted from dedicated sponsors that promoted market adoption. Due to the weak regime of appropriability, audio files in the MP3 format managed to spread quickly over the Internet. Lastly, the availability of complementary assets for MP3 fueled its market adoption and strengthened network externalities on both sides of the platform-mediated network.

2. Theoretical Overview

The body of literature on management of technology and innovation, labels compressed audio formats as platform technologies. Platforms are products, technologies or services consisting of core components which remain stable, and interfaces which allow the core components to operate with complements as one system (Baldwin & Woodard, 2009). Interfaces are often codified into standards. Platforms may occur on multiple levels of a product’s architecture: a personal computer is a platform, and its operating system as well. Platforms may enable ‘platform-mediated networks’, facilitating the interaction between two groups of users, the supply network (which provides complementary products) and the demand network (Eisenmann et al., 2006). For example, in the case of the Compact Disc platform, the record labels constitute the supply network and the consumers constitute the demand network. Other well-known examples where content providers and consumers interact through platforms can be found in the video (e.g. VHS and DVD) and videogame industry (e.g. PlayStation). The platform’s value to a user depends on the size of the network on the other side, and the two networks attract each other (Rysman, 2009). This phenomenon whereby the functionality for a user increases, i.e. complementary goods become more plentiful and lower in price, if more users join is known as cross-side or indirect network externalities (Arthur, 1994; Arthur, 1996; Eisenmann et al., 2006; Liebowitz & Margolis, 1994). Platforms can also experience same-side or direct network externalities, whereby an increase in the number of users on one side of the network makes the platform either more or less valuable to users in that network. Since platform mediated networks are prone to externalities, industries governed by platform technologies often have a single platform that has a dominant market share, or in other words, can be regarded as the market standard.